Understanding Credit Limit and How is it Determined?

Posted by amrina alshaikh on June 12th, 2021

With the proliferation of credit line apps, understanding credit limit has become the need of the hour. These apps have undoubtedly made borrowing easier for whoever needs money instantly. Knowing how credit limit is determined allows you to stay better prepared to extract the most from an online credit loan.

Read on to know the importance of credit limit and the mechanism followed by credit line apps while determining your credit limit.

What is Credit Limit?

The credit limit is a monetary value that credit line apps assign to borrowers. A borrower can withdraw any amount within the credit limit. When the withdrawal amount reaches the credit limit, the credit line app blocks the withdrawal and notifies you to contact the lender. 

Whenever you purchase with your card or through a credit line app, the purchase amount gets added to the card balance. To find the available credit, you have to subtract the amount spent or balance from the credit limit. Every time you make an online credit loan payment, your balance comes down, and you can withdraw till the credit limit.

You can find your credit limit in the dashboard of a credit line app or on the monthly statement.

The credit limit of a borrower is vital for two reasons. First, it helps borrowers put a cap on their purchases and keep the online credit loan EMIs in check. Second, it helps the lender to maintain a healthy relationship with the customer.

How Is The Credit Limit Determined?

The answer to this question is not simple. Different credit line apps or lenders adopt different strategies and techniques to determine a borrower's credit limit. However, the most common factors that influence the credit limit are as follows:

Credit Score and Credit History

Credit score and credit history are the two most vital parameters credit line apps consider before determining the borrower's credit limit. When you avail of an online credit loan, the lender gives you credit without any collateral. Hence, to minimise their risk, they check the borrower's credit score before deciding the credit limit.

Credit score depends on the borrower's credit history. If you pay all loan EMIs on time, your credit history will be good. When your credit history is good, your credit score will be high, and your lender might feel inclined to approve the loan. However, when you do not have a credit score, you may have to furnish income and bank account details to prove your repayment capability.

Monthly Income and Current Debt Profile

Your monthly income is related to the credit limit. However, even more, critical is the debt-to-income ratio. Let us understand this with an example.

Let us assume that your monthly income is INR 50,000 and you have no debt. Your debt-to-income ratio will be 0% in such a case, and hence, the credit line app may offer you the highest credit limit. However, the moment your debt-to-income increases, the credit limit takes a plunge.

Another factor that is closely associated the income and debt is the Credit Utilization Ratio or CUR. CUR is the amount you utilise proportionate to the credit limit. The lower the CUR, the higher the chances of online credit loan approval. If you own multiple cards or have an online credit loan with unused credit, your CUR will be low. However, if you own a single card and keep using it until it reaches the credit limit, your CUR will be high. Credit line apps prefer increasing the credit limit when the borrower's CUR is low.

Other Factors

Sometimes, a credit line app looks at your existing cards and their credit limits. They often provide no more than a 10% enhancement in the credit limit. For example, if your credit limit on other cards is an average of INR 1,00,000, you are unlikely to get more than a 10% enhancement in the credit limit.  

The type of credit card or online credit loan also affects the credit limit. Some premium cards offer higher credit limits for Elite customers. But, for all other cards, the credit limit depends on the lender's discretion.

Conclusion

A credit line app is the best way to get instant cash. Knowledge about the credit limit and its mechanism can better help you utilize a card or online credit loan.